Facebook: Capstone Ups Target to $35 on New Products; No Sign of User ‘Fatigue’

By Tiernan Ray

Capstone Investments’s Rory Maher today reiterates a Buy rating on shares of Facebook (FB) and raises his price target to $35 from $26 after raising estimates for 2013 through 2016 on the “expectations for new revenue lines like FBX to grow into meaningful businesses.”

The Facebook Exchange, introduced earlier this year to compete with other advertising exchanges run by Google (GOOG) and Microsoft (MSFT) and others, may be able to capture upwards of 10% or more of the $2 billion that will be spent on exchanges in 2013 by U.S. advertisers, giving the company $260 million next year in incremental revenue.

Maher describes how he sees the new ventures at Facebook becoming real businesses:

We believe custom audiences is driving incremental spend from advertisers, especially as they market to existing customers during the 4Q holiday shopping season. In addition, most of the advertisers we speak with were using Offers early on during 4Q and buying media to promote those offers. Overall we believe products launched in the last couple quarters, like sponsored stories, mobile, and custom audiences have performed very well for advertisers and is leading to increased spend on the platform. We See Incremental Long-Term Revenue From New Business Lines. We believe Facebook has recently launched new business lines that could drive further long-term incremental revenue, specifically its recently launched exchange, FBX. We believe the exchange industry is one of the fastest-growing aspects of online display and should continue to become a more meaningful part of the way online display inventory is bought and sold. Advertisers we speak with indicate early progress at FBX that we believe should lead to meaningful share gains in an industry that should exceeded $2B in 212 revenue. In addition, we see further incremental lines from new revenue lines like Gifts and what we see as an inevitable ad network being launched in the next couple years.

Facebook has other, “untapped” opportunities, in video, where it has done little to the present, Maher’s advertising world contacts tell him, and in local advertising, where he thinks Facebook has amassed just as many local listings data as Google and Yelp (YELP), but has done nothing to monetize them so far.

There’s a risk of fatigue among users if Facebook goes too far with advertising, Maher notes, but he thinks so far things are alright because Facebook users are “sharing” more than ever:

However, if sharing is any indication of activity on the network our share tracking software indicates users are interacting with the site more than ever as Facebook continues to account for over 65% of all content shared online. A less scientific analysis would suggest that users simply have incorporated sharing themselves on Facebook and viewing others’ profiles deeply into their everyday lives and won’t stop despite some ad annoyance. A similar correlation could be made about TV. Viewers have long complained about ad clutter, but people are watching more TV than ever and in an age with endless media possibilities.

As far as the estimates, Maher raised his 2013 estimate to $6.92 billion and 66 cents a share I profit from a prior $6.66 billion and 64 cents. For 2014, he models 9.63 billion and 87 cents, up from $8.86 billion and 83 cents.

Add a Comment

We welcome thoughtful comments from readers. Please comply with our guidelines. Our blogs do not require the use of your real name.

Comment

There are 3 comments

DECEMBER 11, 2012 11:38 A.M.

charles wrote:

Questionable user number on FB. And if privacy poll is any indication of user fatigue - either this user number is fake or the fatigue is real - they're not responding...
"...FB user poll on data privacy issues has closed with only a tiny percentage of the site’s users actually taking the time to vote, despite the potential for the social site to increase personal information sharing with third-parties. The vote, which opened on December 3, saw around 669,000 users cast their opinion, the BBC reports, approximately 0.06-percent of the billion-plus membership"

DECEMBER 11, 2012 12:05 P.M.

Luke wrote:

So you mean they changed their target price of $26 because FB is at $28?? What a GREAT idea.

And Charles you are incorrect with your fatigue and fake user data. Clearly you did not pay attention to the Q3 numbers. Fake users dont make profits.

About Tech Trader Daily

Tech Trader Daily is a blog on technology investing written by Barron’s veteran Tiernan Ray. The blog provides news, analysis and original reporting on events important to investors in software, hardware, the Internet, telecommunications and related fields. Comments and tips can be sent to: techtraderdaily@barrons.com.